This week BBC Radio 4's Money Box programme explores the pitfalls of setting up home with Help to Buy (click icon below to listen).
Here's a summary of what the programme discusses:
The Government Help to Buy ISA is being replaced by the Lifetime ISA. Basically the government pays a high rate of interest on it if you use it to buy a house (though, frustratingly, you don't get the money back until you've completed using your OWN money). You then get five years in the house interest free. But you really need to make your fortune in this time because, by year 6, the repayment goes up by inflation PLUS 1% EVERY YEAR for 25 years, This means that by the end, the homeowner is paying the sort of mortgage rates that we would normally call 'sub-prime' rates. That is, the sort of rates that destroyed the US mortgage market taking dozens of banks with it in the fallout.
And the Government is building ENTIRE TOWNS based on this principle. Indeed, NA3 will be offered to young people encouraged to embrace this scheme. It will get plenty of take-up, because the scheme is ONLY offered to people who buy a new-build.
On the programme David O'Leary from the housebuilders federation admits that newbuilds sold this way are sold at a 'premium', ie, overpriced. On top of that the Help to Buy scheme adds 15% to the cost, meaning that the burden of purchase is huge once the five-year breathing space ends. Worse, the resale value is 'unlikely' ever to reach the equity invested, meaning homeowners won't be able to sell these two-bedroom shoeboxes and move up the ladder as their families grow. They'll be trapped.
Negative equity is a big enough threat to house buyers now. But with the Bank of England base rate expected to rise and rise in the next few years, people buying newbuilds under such a scheme will basically be putting their heads in a guillotine
and just hoping the blade doesn't fall. Because if the base rate gets anywhere near where it was in the mid-90s we are going to see vast swathes of Teignbridge foreclosed on. The same thing happened in Ireland and Spain, but they've mostly learned their lessons.
Here the Government seems to have looked at the conditions for market collapse in other countries and painstakingly replicated them here for our young people to fall prey to.
Listen to the programme (while it's still up) here